Total Return vs other performance measures?

[1nvest]

...is almost guaranteed to be completely irrelevant as a valid criticism against income investing...

Obviously only a proportion of investors are income investors, for others the amount/timing of dividends is largely irrelevant other than being a cost/tax event that might otherwise have been avoided.

[Itsallaguess]

...is almost guaranteed to be completely irrelevant as a valid criticism against income investing...

Obviously only a proportion of investors are income investors, for others the amount/timing of dividends is largely irrelevant other than being a cost/tax event that might otherwise have been avoided.

You're wilfully missing the point yet again, and one has to ask why that might be the case....

The timing of dividends is largely irrelevant *even to* income investors, due to the extremely high likelihood that some form of 'holding account' is used to capture the ongoing dividend stream, and where some level of capital-buffer is highly likely to be built up before ongoing 'payments' to the income investor are then carried out.

If you could explain which of the above detail you're not quite grasping, then I'm happy to help with further detail if necessary, but to give another example of how your persistent and wilful misrepresentation might be mirrored against TR-based investors who might sell down holdings to generate spending, I can offer the following -

1. A TR-investor wants to go shopping for his weekly shop on Saturday - T+3 broker sales mean that he needs to know exactly how much that shopping is going to be, and to sell enough shares on Wednesday to specifically cater for that shopping. He's also incurred a set of broker fees to generate his Saturday shopping money, and of course he's also running the risk that he'll actually spend more on his meal three days later than he's taken out of his TR-based portfolio on the Wednesday....

2. A TR-investor also then wants to go out for a meal on the following Monday night, so T+3 broker sales mean that he needs to know exactly how much that meal is going to be, and then needs to sell just enough shares on Friday to specifically cater for that meal. He's also then incurred another costly set of broker fees to generate his Monday meal money, and of course he's also now running the risk that his meal on Monday night might actually be more expensive than he initially planned for, clearly running the risk that he's not got enough money to pay for it....

I won't go on, but of course I would hope that you get the point 1nvest, in that the above set of steps is of course a ridiculous example of how a TR-based investor who generates his spending through share-sales *might* carry out a costly, risky (sales might not actually match subsequent three-day-later spending..), and clearly over-complicated cash-generating process, but it really is no more ridiculous an example than you repeatedly trying to suggest than an income investor who might be going out for a meal on Saturday night needs a dividend to land the Friday before to enable him to actually pay for it....

I would hope that the above explanation would be enough to enable a level of enlightenment in you that might prevent the repeating of your 'dividend payment timings don't match spending' criticism, but please, if you continue to think it's a valid one, can you please explain in clear detail why you think that's the case, and why such 'matching' criticism would not *equally apply* to TR-based investors as well, given the above *equally valid* TR-based steps, following the same timing-based and cost-based logic as your own argument...?

Cheers,

Itsallaguess

[88V8]

...is almost guaranteed to be completely irrelevant as a valid criticism against income investing...

Obviously only a proportion of investors are income investors, for others the amount/timing of dividends is largely irrelevant other than being a cost/tax event that might otherwise have been avoided.

True.
But for some, like me, it doesn't really matter.

Yes, the income is lumpy. Fortunately that doesn't matter to me.
And I am an income investor, so, again, TR doesn't really matter but I can see it's a useful metric if one wants to decide whether to pursue the investment hobby, or just sling the pot into a fund.

The tax is a valid point. Presently I can redeem capital - assuming I have profits - at a cost of 20% whereas dividends cost me 32.5%.
But regular capital redemption is only a viable strategy in a rising market, so it's not a magic bullet.
Would I deliberately move from dividend stocks to growth stocks in pursuit of a tax-based strategy. Well I can see that if one were really trying to extract all the juice from the lemon, one might.
I should give it some thought.

Talking of thought, in a Beerpig post a while ago, Dod lamented the dearth of investment discussions. Currently we seem to have several ongoing on various boards.
They serve to illustrate the sometimes difficulty of discussions across differing investment aims, and the ease with which folks become irate with one another.
Occasionally someone lobs in the bombshell observation that 'this is all based on the past and it's different now' which is always true to a degree but if we worried about that too much there could be no useful discussion.

It's fascinating, the different ways that people pursue their investment hobbies.

V8

[Alaric]

TR-based investors who might sell down holdings to generate spending

A more practical approach to running down invested assets would be to put all the spending on a credit card. Then sell enough assets to at least pay the credit card bill when it came in. A dividend investor without a cash buffer might have to employ a similar method or even let the debt run until sufficient funds were available.

[1nvest]

...is almost guaranteed to be completely irrelevant as a valid criticism against income investing...

Obviously only a proportion of investors are income investors, for others the amount/timing of dividends is largely irrelevant other than being a cost/tax event that might otherwise have been avoided.

You're wilfully missing the point yet again, and one has to ask why that might be the case....

The timing of dividends is largely irrelevant *even to* income investors, due to the extremely high likelihood that some form of 'holding account' is used to capture the ongoing dividend stream, and where some level of capital-buffer is highly likely to be built up before ongoing 'payments' to the income investor are then carried out.

If you could explain which of the above detail you're not quite grasping, then I'm happy to help with further detail if necessary, but to give another example of how your persistent and wilful misrepresentation might be mirrored against TR-based investors who might sell down holdings to generate spending, I can offer the following -

1. A TR-investor wants to go shopping for his weekly shop on Saturday - T+3 broker sales mean that he needs to know exactly how much that shopping is going to be, and to sell enough shares on Wednesday to specifically cater for that shopping. He's also incurred a set of broker fees to generate his Saturday shopping money, and of course he's also running the risk that he'll actually spend more on his meal three days later than he's taken out of his TR-based portfolio on the Wednesday....

2. A TR-investor also then wants to go out for a meal on the following Monday night, so T+3 broker sales mean that he needs to know exactly how much that meal is going to be, and then needs to sell just enough shares on Friday to specifically cater for that meal. He's also then incurred another costly set of broker fees to generate his Monday meal money, and of course he's also now running the risk that his meal on Monday night might actually be more expensive than he initially planned for, clearly running the risk that he's not got enough money to pay for it....

I won't go on, but of course I would hope that you get the point 1nvest, in that the above set of steps is of course a ridiculous example of how a TR-based investor who generates his spending through share-sales *might* carry out a costly, risky (sales might not actually match subsequent three-day-later spending..), and clearly over-complicated cash-generating process, but it really is no more ridiculous an example than you repeatedly trying to suggest than an income investor who might be going out for a meal on Saturday night needs a dividend to land the Friday before to enable him to actually pay for it....

I would hope that the above explanation would be enough to enable a level of enlightenment in you that might prevent the repeating of your 'dividend payment timings don't match spending' criticism, but please, if you continue to think it's a valid one, can you please explain in clear detail why you think that's the case, and why such 'matching' criticism would not *equally apply* to TR-based investors as well, given the above *equally valid* TR-based steps, following the same timing-based and cost-based logic as your own argument...?

Cheers,

Itsallaguess

I'm a income investor but don't have a separate cash buffer as you outlined above, I just log in each month a few days ahead of 'pay day' (end of month) and sell enough shares to generate my next months regular wage out of total returns. That is uplifted by inflation/whatever each year as per SWR style so a reliable inflation adjusted income. Being sourced from capital gains and none of the assets paying dividends/interest tax only has to be paid if the sale proceeds amount to more than gains of £12,300/year each, so for instance up to £24,600/year if the shares/whatever being sold had doubled in price. But that's only for part of total holdings as the portfolio includes some being in ISA's and some that pays no interest nor is liable for any capital gains taxation. As such self assessment tax report is straight forward. I don't count my spending account into which proceeds from sales are transferred as being part of my portfolio, its considered as hard cash/spent money. If that falls short during the month I can make another 'withdrawal' with T+3 notice period, or use credit cards, similar if working for a regular wage and you over-spend during a month.

The method you describe of income investors also holding a separate holding account and cash buffer to accommodate variable dividends etc. means that if for instance just stocks were being held then that separate 'cash' buffer is part of the portfolio, a stock/bond type combination, and as such if you wanted to compare the total return with another portfolio the combined values/total return has to be accounted for in order that a fair comparison might be made. And where self assessment might have to detail and pay taxes on the dividends added across the year.

In my TR based approach I retain more fully invested and pay less costs/taxes (I'm with ii so as part of that there's a free trade allowance each month). Yes occasionally that may mean selling after price-declines/when-down however diversification tends to take care of that i.e. I sell the asset that is the most above its target % weighting each month which also has the effect of partial rebalancing back to target weightings. SWR provides a guide as to the percentage of portfolio value might have been drawn historically in the worst historic cases and still met objectives, when your actual percentage is below that guideline figure/% then strict adherence to SWR is no longer required, you're pretty much set/secure excepting if forward time circumstances prove to be worse/outside of historic worst cases (which includes some pretty wild extremes). So in effect my total return % gain is the full actual total return. Another who was invested in stocks along with a cash buffer to accommodate varying dividends should rightfully include that 'cash buffer' as part of reporting their total return in order for a fair full comparison to be made, and better still after also factoring in costs/taxes even if just levelled to the same tax band rates applied equally to both such as Joe Averages basic/standard tax rates.

Putting aside the maintenance of a separate cash buffer to more closely compare actual fully-invested amounts leads to either dividends likely being too much or too little, inducing unnecessary cost/tax events.

With respect it is you that is missing the point due to your preconceived assumptions. Fundamentally however its irrelevant, a £ is a £ no matter where it is sourced from. Flip that "why?" and why might some object to total return type measures - and I suspect its due to a desire to hide away from fair comparisons.

[Bubblesofearth]

The issue I have with income investment is that it can force you down a narrow investment channel. Good examples of this are the numerous HYP portfolios presented on these boards that are taken primarily from high yielding FTSE 100 shares. Fine if the FTSE 100 performs well but it has been a very poor cousin to other markets, and indeed the World index, for a long time.

A total return mindset is less likely to suffer from this restriction.

BoE

[Itsallaguess]

The issue I have with income investment is that it can force you down a narrow investment channel.

Good examples of this are the numerous HYP portfolios presented on these boards that are taken primarily from high yielding FTSE 100 shares. Fine if the FTSE 100 performs well but it has been a very poor cousin to other markets, and indeed the World index, for a long time.

A total return mindset is less likely to suffer from this restriction.

I think that's an absolutely fair comment, but I think it's important to focus on the word 'can'....

Are you happy to accept, though, that simply being an income-investor, primarily interested in dividend-based investment income, doesn't necessarily and automatically mean that someone *is* a HYP/FTSE100 investor?

The running yield on my income-portfolio is around 4.2%, and I've got a large and growing set of global, income-delivering components that are very widely diversified individually in their own right as well..

Is it right then, that any mention of 'income-investing' should automatically bring forth a particular set of criticisms related to one unique sub-set of a particular approach, when it's clear that there are many income-investors here who cast a much wider net in terms of diversified global investments that happen to also deliver income in the form of dividends?

Almost no account seems to generally be given to the fact that HYP isn't the only income-investment process available, with other income-based approaches often followed that largely discount much of the often quite valid criticisms of that particular approach, and there's enough instances even in this thread to show that this is sadly still the case...

Cheers,

Itsallaguess

[Bubblesofearth]

I think that's an absolutely fair comment, but I think it's important to focus on the word 'can'....

Are you happy to accept, though, that simply being an income-investor, primarily interested in dividend-based investment income, doesn't necessarily and automatically mean that someone *is* a HYP/FTSE100 investor?

Cheers,

Itsallaguess

Yes, completely agree. It's probably because TLF is UK-based that so many example portfolios, threads, and indeed boards, are devoted to FTSE 100 (with some FTSE 250) equities. I have no issue if people wish to pursue a HYP or HYP-like approach. The danger is that others get sucked in by the sheer popularity of this approach hereabouts and the usually contented accounts given by holders. The approach is often defended by reference to performance vs local benchmarks or even the (to me) astonishing view that capital doesn't matter or is entirely secondary to income. The danger is compounded by the degree to which dissenting voices (especially on HYP-practical) are unwelcome.

Niche investment approaches can work well for a long time but eventually the risk inherent in them will out.

BoE

[dealtn]

Of course I keep an eye on things, but I don't really measure performance as such - as long as it all ticks along and the income seems sustainable (by whatever combination of means) then I'm not quite sure how "Total Return" is relevant? If somebody would like to explain how to go about "measuring my Total Return" then I may consider giving it a go out of curiosity, but, quite honestly, I struggle to see the point - all I'm bothered about is ensuring my ability to continue generating the income I require...

Total return isn't just about measurement though. It's a recognition that performance comes in more than one form, and that in the long run it is the "total" return that matters in how your "pot" delivers whatever benefits you ask of it.

So you can measure it if you choose, and it will be a more complicated calculation than a simple yield one, for instance, but that's not the point. It's not the calculation itself that puts "food on the table".

In a very simple world if you have a savings account that pays 3% interest, but you have a facility that pays 4% of the end of year balance into your current account account to live off, do you consider the "total return" on your investment as 3%, or do you prefer to see the yield as 4% income? What if there was an alternative savings account that paid 5%, but only diverted 3% of the closing balance to the current account. Do you have a better 5% total return, or a lower 3% income?

Running the plans for 10, 30, 50 years etc. it is obvious which is the better. It is the "total return" that matters not the "current" income.

None of which adds much to the debate about whether high yielding UK equities tend to have higher total returns than alternative investment strategies. Over differing time frames that has proved to be the case (and over different ones not the case!), and in the future there will be times where that is also true (and not).

However a belief that high (current) yield is the most important determinant of a long run strategy's performance (be that measured in income, capital, or both, terms) is a poorly based belief.

[CryptoPlankton]

Of course I keep an eye on things, but I don't really measure performance as such - as long as it all ticks along and the income seems sustainable (by whatever combination of means) then I'm not quite sure how "Total Return" is relevant? If somebody would like to explain how to go about "measuring my Total Return" then I may consider giving it a go out of curiosity, but, quite honestly, I struggle to see the point - all I'm bothered about is ensuring my ability to continue generating the income I require...

Total return isn't just about measurement though.

Yes, but I believe this thread was initiated to investigate why "Total Return might not be the be all and end all of measurement* to some people, which is the question I was addressing - am I wrong?

So you can measure it if you choose, and it will be a more complicated calculation than a simple yield one, for instance, but that's not the point. It's not the calculation itself that puts "food on the table".

In a very simple world if you have a savings account that pays 3% interest, but you have a facility that pays 4% of the end of year balance into your current account account to live off, do you consider the "total return" on your investment as 3%, or do you prefer to see the yield as 4% income? What if there was an alternative savings account that paid 5%, but only diverted 3% of the closing balance to the current account. Do you have a better 5% total return, or a lower 3% income?

Running the plans for 10, 30, 50 years etc. it is obvious which is the better. It is the "total return" that matters not the "current" income.

Certainly no argument here! But how important is it to measure the total return? My dividends are generally growing and always exceed my withdrawals, my capital values are increasing, I can raise my rental income from time to time and property prices seem to be heading up. Should I work out a figure for my total return? If so, to what end? I know that it would be possible to shoot for higher returns with a different strategy, but I feel very comfortable with what I'm doing.

None of which adds much to the debate about whether high yielding UK equities tend to have higher total returns than alternative investment strategies. Over differing time frames that has proved to be the case (and over different ones not the case!), and in the future there will be times where that is also true (and not).

Which kind of illustrates the futility of measuring your total return, comparing it historically with other strategies/benchmarks and trying to predict anything useful about the future, doesn't it?

However a belief that high (current) yield is the most important determinant of a long run strategy's performance (be that measured in income, capital, or both, terms) is a poorly based belief.

I absolutely agree, though I'm not sure why you are saying it? Unless, of course, it is what you may have erroneously inferred from my earlier post?
If so, then let me assure you that it is not my belief

[Itsallaguess]

However a belief that high (current) yield is the most important determinant of a long run strategy's performance (be that measured in income, capital, or both, terms) is a poorly based belief.

I absolutely agree, though I'm not sure why you are saying it?

Aww....come on CP......it's in the standard list of anti-income-investment MacGuffins.....

• You're an income-investor, so you *must* be a high-yield income investor...

• You're an income-investor, so you *must* only invest in the relatively narrow, FTSE100 market...

• You're an income-investor, so *YIELD ALONE* is the only driver for any and all of your investment decisions...

• You're an income-investor, so *all* your investments will turn into a Carillion nightmare...

• You're an income-investor, so if you're going out for a family meal on Saturday night, then the whole event will be spoilt if you don't receive a large enough dividend on Friday with which to pay for it...

• You're an income-investor, so all your holdings must be in accounts with no tax-sheltering, and as such, all your dividend income is ravaged by tax...

• You're an income-investor, so any potential re-investment of non-required income faces large broker costs to do so, completely ignoring cheap dealing days and accounts with rolling monthly fee-returns...

• You're an income-investor, so you need to be measuring and comparing performance all the time, rather than enjoying non-measurable benefits that might be very important to you...

MacGuffin - an object, event, or character in a film or story that serves to set and keep the plot in motion...

https://www.merriam-webster.com/dictionary/MacGuffin

Where would we be without them.....

Cheers,

Itsallaguess

[Newroad]

Straw Man Fallacy: https://en.wikipedia.org/wiki/Straw_man

[mickeypops]

I’m an income investor, partially funding our retirement via dividend producing ITs into our Sipps.

The way it works with Hargreaves Lansdown is that the dividends arrive into the Sipp account as cash. (Very reliably and promptly might I add.) Now, you advise HL of the amount you wish to withdraw each month, which you can change at any time, and it’s up to you to ensure there’s enough cash in the account to meet the automatic withdrawal. In our case, we request an amount slightly below the expected monthly average divis for the year, having built up a buffer of about one to two months average payments in the account. You can request one off additional payments also. Very hassle free.

I’m reinforcing IAAG’s point that most income investors would have some method of smoothing out the income I think. Also. It’s perfectly possible to have an income portfolio covering all markets, sectors and even themes such as renewables, infrastructure, property. There is no need whatsoever to have a narrow investment focus, unless that’s what you wish to do.

What did surprise me in retirement is that HMRC manage my income tax affairs without self-assessment, despite having three distinct DB pensions, the State pension, and the Sipp withdrawals. They’re more efficient than I expected!

[Alaric]

There is no need whatsoever to have a narrow investment focus, unless that’s what you wish to do.

It was TMF and more recently TLF, perhaps incited by some of its contributors who capitalised the words high yield and portfolio and made it synonymous with a narrow focus even to the extent of having dedicated boards with restrictions on critical comment.

[dealtn]

However a belief that high (current) yield is the most important determinant of a long run strategy's performance (be that measured in income, capital, or both, terms) is a poorly based belief.

I absolutely agree, though I'm not sure why you are saying it?

Aww....come on CP......it's in the standard list of anti-income-investment MacGuffins.....

It most certainly isn't.

If you want to lump my quote, and by implication me, into that kind of camp I suggest you reassess.

I very carefully chose "most important", I made no comment about yield being unimportant, or any derogatory remarks that about followers of an income strategy. My views aren't too far removed from yours on that front. If it works for them, delivering their chosen objectives ...

Your list is comprised of statements containing "must", "only", "all", "whole event", "need" etc.

If you wish to call out those making inappropriate statements, fine. If you find me making a remark similar to those you proposed please do so.

[Itsallaguess]

(in response to dealtn saying -

However a belief that high (current) yield is the most important determinant of a long run strategy's performance (be that measured in income, capital, or both, terms) is a poorly based belief.)

I absolutely agree, though I'm not sure why you are saying it?

Aww....come on CP......it's in the standard list of anti-income-investment MacGuffins.....

It most certainly isn't.

If you want to lump my quote, and by implication me, into that kind of camp I suggest you reassess.

I very carefully chose "most important", I made no comment about yield being unimportant, or any derogatory remarks that about followers of an income strategy. My views aren't too far removed from yours on that front. If it works for them, delivering their chosen objectives ...

Your list is comprised of statements containing "must", "only", "all", "whole event", "need" etc.

If you wish to call out those making inappropriate statements, fine. If you find me making a remark similar to those you proposed please do so.

Sorry dealtn, but I''ve re-read your original post a number of times now, and I still can't see how what you wrote wasn't looking to attribute the view that CP followed the 'poorly based belief' that you're describing at the end of it..

If you didn't mean to do that, then I'm completely happy to accept that this was the case, but given that CP himself also asked why you raised the 'poorly based belief' point, then I hope we can all accept that you doing so in the way that you did has caused some clear confusion as to the attribution of it...

Cheers,

Itsallaguess

[CryptoPlankton]

Aww....come on CP......it's in the standard list of anti-income-investment MacGuffins.....

It most certainly isn't.

If you want to lump my quote, and by implication me, into that kind of camp I suggest you reassess.

I very carefully chose "most important", I made no comment about yield being unimportant, or any derogatory remarks that about followers of an income strategy. My views aren't too far removed from yours on that front. If it works for them, delivering their chosen objectives ...

Your list is comprised of statements containing "must", "only", "all", "whole event", "need" etc.

If you wish to call out those making inappropriate statements, fine. If you find me making a remark similar to those you proposed please do so.

Sorry dealtn, but I''ve re-read your original post a number of times now, and I still can't see how what you wrote wasn't looking to attribute the view that CP followed the 'poorly based belief' that you're describing at the end of it..

If you didn't mean to do that, then I'm completely happy to accept that this was the case, but given that CP himself also asked why you raised the 'poorly based belief' point, then I hope we can all accept that you doing so in the way that you did has caused some clear confusion as to the attribution of it...

Cheers,

Itsallaguess

Yes, I felt moved to reply to dealtn as the implication seemed to be that it is my belief "that high (current) yield is the most important determinant of a long run strategy's performance". Nowhere in my post did I suggest that my income strategy (which includes rental income and drawdown from a 'low-yielding' SIPP) is driven by HIGH YIELD. In fact, even allowing for the higher yielding components (largely fixed interest), my "income portfolio" is currently yielding only a little over 4%. If you include the rest of my equity investments the overall yield is a little under 3%. The "most important determinants" of my strategy's performance are it's overall ability to produce my desired income (through dividends, rent and drawdown), and the amount of "slack" available in achieving that. This gives me an idea of my own personal "rolling" safe withdrawal rate which is all I'm interested in. I suppose you could say this involves some "awareness" of total return, but I feel no necessity to to calculate it as a measure of performance, which I thought was the question I was addressing.

There does seem to be a view held by some that anyone who derives income from dividends must be a mindless high-yield seeker who gives little further thought to their investments. I would suggest that this is far from the truth and most "income investors" know exactly what they are doing. In any event, the ensuing discussions rarely lead to anything constructive and we would probably all be better served by sticking to the request of the site administrators in the Rules: "to be respectful, understanding and helpful to other posters".

[dealtn]

Yes, I felt moved to reply to dealtn as the implication seemed to be ...

I too have reread the exchange.

My comment about high yield being "most important ..." was intended as a general comment. It wasn't meant to be specific to you, and hence shouldn't have inferred anything about your beliefs or practices. It was poorly worded in that context and I can see how the interpretation arose.

Regardless my comment(s) are far removed from the list of "anti-income-investment MacGauffins..." that by implication I am being associated with. Such extremism doesn't reflect my views, or to my knowledge my commentary on this site. That's not how I view "income investors".